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Preface
Preface to The Interpretations of Financial Reporting Standards
INT FRS 1
Consistency - Different Cost Formulas for Inventories
INT FRS 2
Consistency - Capitalisation of Borrowing Costs
INT FRS 3
Elimination of Unrealised Profits and Losses on Transactions with Associates
INT FRS 5
Classification of Financial Instruments - Contingent Settlement Provisions
INT FRS 6
Costs of Modifying Existing Software
INT FRS 7
Introduction of the Euro
INT FRS 8
First-Time Application of FRSs as the Primary Basis of Accounting
INT FRS 9
Business Combinations - Classification either as Acquisitions or Unitings of Interests
INT FRS 10
Government Assistance - No Specific Relation to Operating Activities
INT FRS 11
Foreign Exchange - Capitalisation of Losses Resulting from Severe Currency Devaluations
INT FRS 12
Consolidation - Special Purpose Entities
INT FRS 13
Jointly Controlled Entities - Non-Monetary Contributions by Venturers
INT FRS 14
Property, Plant and Equipment - Compensation for the Impairment or Loss of Items
INT FRS 15
Operating Leases - Incentives
INT FRS 16
Share Capital - Reacquired Own Equity Instruments (Treasury Shares)
INT FRS 17
Equity - Costs of an Equity Transaction
INT FRS 18
Consistency - Alternative Methods
INT FRS 19
Reporting Currency - Measurement and Presentation of Financial Statements under FRS 21 and FRS 29
INT FRS 20
Equity Accounting Method - Recognition of Losses
INT FRS 21
Income Taxes - Recovery of Revalued Non-Depreciable Assets
INT FRS 22
Business Combinations - Subsequent Adjustment of Fair Values and Goodwill Initially Reported
INT FRS 23
Property, Plant and Equipment - Major Inspection or Overhaul Costs
INT FRS 24
Earnings Per Share - Financial Instruments and Other Contracts that May Be Settled in Shares
INT FRS 25
Income Taxes - Changes in the Tax Status of an Enterprise or its Shareholders
INT FRS 27
Evaluating the Substance of Transactions Involving the Legal Form of a Lease
INT FRS 28
Business Combinations - "Date of Exchange" and Fair Value of Equity Instruments
INT FRS 29
Disclosure - Service Concession Arrangements
INT FRS 30
Reporting Currency - Translation from Measurement Currency to Presentation Currency
INT FRS 31
Revenue - Barter Transactions Involving Advertising Services
INT FRS 32
Intangible Assets - Web Site Costs
INT FRS 33
Consolidation and Equity Method - Potential Voting Rights and Allocation of Ownership Interests
   
 
Home > Accounting Standards > Interpretations of Financial Reporting Standards 2003 > INT FRS 14
 

Interpretation of Financial Reporting Standard


INT FRS 14

 

Property, Plant and Equipment - Compensation for the Impairment or Loss of Items

 

Paragraph 11 of FRS 1, Presentation of Financial Statements, requires that financial statements should not be described as complying with Financial Reporting Standards unless they comply with all the requirements of each applicable Standard and each applicable Interpretation of the Financial Reporting Standard. INT FRSs are not intended to apply to immaterial items.

 

Reference: FRS 16, Property, Plant and Equipment

 
ISSUE
 
 
  1. Enterprises may receive monetary or non-monetary compensation from third parties for the impairment or loss of items of property, plant and equipment. Often the monetary compensation received has to be used for compelling economic reasons to restore impaired assets or to purchase or construct new assets in order to replace the assets lost or given up. FRS 16 does not give explicit guidance on how to account for such monetary or non-monetary compensation.

  2. Examples of such cases may include:
    1. reimbursement by insurance companies after an impairment or loss of items of property, plant and equipment, for example, due to natural disasters, theft or mishandling;

    2. indemnities by the government for items of property, plant and equipment that were expropriated, for example, land that has to be used for public purposes;

    3. compensation related to the involuntary conversion of items of property, plant and equipment, for example, relocation of facilities from a designated urban area to a non-urban area in accordance with a national land policy; or

    4. physical replacement in whole or in part of an impaired or lost asset.

  3. The issue is how an enterprise should account for:

    1. impairments or losses of items of property, plant and equipment;

    2. related compensation from third parties, and

    3. subsequent restoration, purchase or construction of assets.
 
CONSENSUS

 

 
4.

Impairments or losses of items of property, plant and equipment, related claims for or payments of compensation from third parties and any subsequent purchase or construction of replacement assets are separate economic events and should be accounted for as such. The three economic events should be accounted for separately as follows:

  1. impairments of items of property, plant and equipment should be recognised under FRS 36; the retirement or disposal of items of property, plant and equipment should be recognised under FRS 16;

  2. monetary or non-monetary compensation from third parties for items of property, plant and equipment that were impaired, lost or given up should be included in the income statement when recognised; and

  3. the cost of assets restored, purchased, constructed as a replacement, or received as compensation should be determined and presented under FRS 16.
   
DISCLOSURE
   
5. Monetary or non-monetary compensation recognised for the impairment or loss of items of property, plant and equipment should be disclosed separately.
   
BASIS FOR CONCLUSIONS
 
6. FRS 36.58 requires that an impairment loss be recognised whenever the carrying amount of an asset exceeds its recoverable amount. Compensation to be received from third parties for the restoration of impaired assets is not included in the determination of the recoverable amount of an asset. Such impairment losses and related compensation are accounted for as separate events.
   
7. FRS 16.56 requires that gains or losses from the retirement or disposal of an item of property, plant and equipment should be recognised as income or expense in the income statement when the item is retired or disposed of.
   
8.

Paragraph 88 of the FRS Framework states: "income is recognised in the income statement when an increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measured reliably". The same rationale applies to compensation receivable from third parties by an enterprise for the restoration or replacement of items of property, plant and equipment that were impaired, lost or given up in the past.

   
9. Where the receipt of compensation from third parties is dependant on the occurrence or non-occurrence of one or more future events not wholly within the control of the enterprise, it is a contingent asset as defined in FRS 37.10. Under FRS 37.31, contingent assets are not recognised. FRS 37.33 states that "when the realisation of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate".
   
10. Under FRS 16.23, expenditure on the restoration of impaired items of property, plant and equipment is added to the carrying amount of the assets to the extent that it is probable that future economic benefits, in excess of the assessed standard of performance of the existing assets after recognition of impairment losses, will flow to the enterprise. Such expenditure may either be incurred by the reporting enterprise itself or directly by the third party obliged to compensate for the impairment.
   
11. Under FRS 16.07 and 14, items of property, plant and equipment acquired or constructed to replace impaired or lost assets are initially recognised at cost.
   
12. FRS 20.24 and FRS 16.20 address situations involving government grants and assistance related to assets. These situations are not analogous to those dealt with in this Interpretation. As a result, setting up compensation funds received as deferred income or deducting the amounts from the acquisition or construction costs of new assets is not appropriate.
   

Effective Date: INT FRS 14 comes into effect on 1 February 2003. Changes in accounting policies should be accounted for according to the transitional requirements in FRS 8.40.

 
 
 
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Last reviewed on 11 December 2007
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